Client: Sparrow, Inc.

Year-end adjusting entries

After reviewing the 12/31/21 year-end adjusting entries made to the company's accounts, Sparrow, Inc. prepares the following list challenging your entries. Sparrow argues that net income should be $72,975; which is the result of removing all of your year-end adjusting entries.

1. The $15,000 balance in the prepaid insurance account represents the payment made for the annual premium on November 1. Sparrow argues that the expense should be recorded when the annual policy expires next October.

2. Sparrow has a $45,000, 5%-3-month note with terms stating that "principal-plus-interest-in-full" is due at maturity. The maturity date is 2/1/22. Sparrow argues that interest expense should not be charged until 1/31/22.

3. Sparrow does not expect any customer accounts to be uncollectible and argues that the $4100 bad debt expense should not be reported.

4. An advance payment of $8,000 was made to Sparrow by Howard Co. on October 1. As of Friday, 12/31/21, the job for Howard was 90% complete. Sparrow argues that no entry would be made at year-end because the job was completed the following Monday.

5. Salaries for the last week of the fiscal year amounted to $6000. Sparrow argues that no expense should be recorded because the cash account will be decreased the following week when the direct deposits are made to the employee's accounts.

6. The $800 annual interest earned on our investment is calculated through 12/31/21. Sparrow argues that no entry would be made at year-end because interest from the investment is received 3 to 5 days after period end, and should be recorded when it is deposited into the account.

You smile and respectfully address each argument on Sparrow's list. As a part of your response to Sparrow, you decide to prepare a chart showing the ramifications of omitting these entries on the integrity of the financial statements and recalculate Sparrow's adjusted net income (Exhibit J).

For each entry (#1-5), you show the effect that omitting the entry will have on reported total assets, total liabilities, and net income: "O" Overstated; "U" Understated; or "N" No effect. Lastly, you recalculate Sparrow's adjusted net income for year ending 12/31/21.

Exhibit J: Sparrow, Inc. Effects of Adjusting Entry Omissions
	Total Assets "O", "U" or "N"	Total Liabilities "O", "U" or "N"	Net Income "O", "U" or "N"
#1
#2
#3
#4
#5
#6

Adjusted net income to be reported 12/31/21 year-ending is

$